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Australia's glittering investments from China are not all gold

Sarah Turner, Special for USA TODAY
10:52 p.m. EDT August 20, 2013

Investment money from abroad was a longtime boom for Australia - but now, there is a backlash

Truck driver Ken Smith hauls giant truck tires along the Peak Downs Highway on June 13 near Mackay city, Queensland state, Australia. The Australian mining boom, built over a decade on Chinese demand for energy and raw materials, is turning into bust as China's economy cools.(Photo: Rod McGuirk, AP)

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SYDNEY, Australia - Massive investment from China in Australian coal, gas and metals was once something the Australian government highlighted as proof of exemplary economic stewardship. No longer.

The money that China and others have poured into the mineral fields of Western Australia and Queensland have made mine owners and miners wealthier. But it has also hurt longtime industries that rely on tourism and exports.

After an amazing 22 consecutive years of stable economic growth, Australians are experiencing a financial downturn. And some of the blame is being leveled on the political class that now runs from the Chinese model it once celebrated.

"The China resources boom is over," said newly reinstated Labor Party leader Kevin Rudd, whose party forced out their prime minster, Julia Gillard, because polls showed she would be trounced by the conservatives in national elections in September.

"The time has come for us to adjust to the new challenges," Rudd said. "New challenges in productivity. New challenges also in the diversification of our economy."

Since 2005, China has invested $51 billion in "non-financial assets" in Australia, according to a report from consulting firm KPMG and the University of Sydney. Much of that money has gone toward the extraction of coal to power China's industries, iron ore and natural gas.

Around 70% of Australia's GDP is generated from the services sector, as most Australians are employed in areas such as tourism and retailing. The mining boom raised the value of the Australian currency, making exported goods and vacations to Australia more expensive.

Australians shopped and traveled overseas to take advantage of their strong currency, rather than buying from domestic stores and suppliers. Manufacturing also took a hit, with exporters suffering and some offshore companies pulling out of the country in the last few years, citing high costs.

U.S. automaker Ford recently said that it would cease making vehicles in Australia.

The relatively high Australian dollar did keep local prices under control, however.

"Australia has avoided the big traps in mining booms such as high inflation," according to a report out recently from public policy think tank Grattan Institute.

But global economic data indicates China's energy needs are slowing. That has led to a drop in prices for Australian ore, revealing the perils of tying one's economic fortunes heavily to one developing nation.

Mining and energy projects worth $147 billion have been delayed or canceled in the past year in Australia as prices for ore declined over worries that China is skinning back on its demand, according to a report by the Bureau of Resources and Energy Economics.

In June, the Lowy Institute, a foreign policy think tank in Sydney, said its polling showed that 57% of Australians believe the country was allowing too much investment from China.

For more than a year, the Reserve Bank of Australia has been preparing for a slowdown in mining investment and took steps to keep interest rates at record lows. In August, the RBA cut rates for the first time in history during an official pre-election period.

The drop in foreign investment is expected to balloon Australia's budget deficit to $30 billion this fiscal year, leaving politicians facing questions about how they can improve the country's finances. Although Australia's unemployment rate remains low by international standards at 5.7%, there's concern that it may start to rise as the mining boom fades further.

With national elections coming Sept. 7, Australians seem primarily concerned with what candidates will do to manage the economy.

The Labor Party's answer is to raise revenue from within, by hiking taxes on tobacco, charging banks for deposit insurance and reining in tax breaks.

The main opposition party, the Liberal-National coalition, has indicated it will scrap taxes on the mining and carbon industries and cut overall corporate tax rates. Opposition leader Tony Abbott said "the Coalition understands the clear connection between taxation policy and investment, jobs and increasing wages."

The Grattan Institute report said Australian governments, regardless of their political leanings, "need to do more to tighten their budgets, which will permit them to respond strongly if the outlook darkens."

And other countries are not helping matters. Australia still ranks at the top of China's accumulated direct overseas investment list, according to the KPMG report, but that may change soon.

China's largest single investment in 2012 was in Canada, including the $15 billion takeover of the Canadian oil and gas company Nexen. Investment into the United States from China in 2012 also outstripped that of Australia, with $14.7 billion invested.